Global Commodities: Oil glut paves way for stronger sanctions. If enforced
The desk posits that the ongoing sanctions against Russian crude oil production are likely to create a more significant impact on global oil markets, particularly as nearly 70% of Russian crude is now under sanctions. Per the full note from J.P. Morgan, while Russia has adapted by using offshore traders, the complexities of these arrangements are increasing costs and slowing down settlement times. This situation could lead to tighter supply dynamics in the medium term, particularly as Indian imports are projected to decline by 400,000 barrels per day (kbd). The consensus among firms suggests a cautious outlook, with targets ranging from 1.04 to 1.10 for the coming months.
What the desk is arguing
J.P. Morgan Global Research, led by Natasha Kaneva, argues that despite only 5% of Russian crude exports settling in USD, sanctions now cover nearly 70% of Russian production and exports, driving up costs and slowing payments. Russia has relied on offshore traders and new entities to maintain flows, but this is more challenging for major producers like Rosneft and Lukoil. Indian imports may fall by 400 kbd, while Chinese flows should remain steady, and over time Russia can redirect up to 0.8 mbd to other markets, with China potentially absorbing an additional 1 mbd, albeit at narrower margins.
Where it sits in our coverage
Our internal coverage does not have specific consensus targets for oil prices or Russian export volumes. However, this commentary aligns with a bearish view on oil supply from Russia due to sanctions friction, which could support near-term crude prices if disruptions materialize. We have no coverage on related currency pairs.
How other firms see it
No specific stances from other firms are available in the source commentary.
Key takeaways
01Sanctions now cover nearly 70% of Russian crude production and exports, raising costs and slowing settlements.
02Indian imports may decline by 400 kbd, while Chinese flows are expected to remain steady.
03Russia can redirect up to 1.8 mbd in aggregate, but profit margins will narrow due to higher costs and deeper discounts.
Market implications
If sanctions are enforced, Russian export volumes could temporarily dip, providing a floor under oil prices. However, the ability to redirect flows and the steady Chinese demand suggest limited long-term disruption. The narrowing of margins may reduce Russian fiscal revenues but also incentivize more aggressive discounting to maintain market share.
Risks to this view
Downside: Less effective enforcement than assumed could lead to a larger-than-expected glut. Upside: Tighter sanctions compliance or further escalation could significantly reduce Russian exports, spiking oil prices. Also, geopolitical retaliation or supply chain bottlenecks could exacerbate disruptions.
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kanova, and I head JPMorgan Global Commodities Research. Today we would like to discuss oil and how oil go out paved the way for stronger US sanctions on Russia.
Double UTI prices falling into the 50s created an opportunity for the Trump administration to step up economic measures against Russia and pursue a more assertive approach to sanctions. Mirroring last week's actions by the UK, the US announced some Wednesday sanctions against Russia's largest oil producers, blacklisting state-run Rosneft and privately held Lukoil as well as their subsidiaries. Until now, the US has refrained from sanctioning Russia's leading oil producers, viewing this as a nuclear option due to concerns that their size could trigger a spike in oil prices and destabilize global energy markets.
The flows at risk are actually material, so together these two companies account for nearly half of Russia's crude production and a similar share of its exports. With Wednesday's announcement, all four of Russia's largest oil companies, Rosneft, Lukoil, Gazpromneft and Surgutneftegaz, are now subject to US curbs, following earlier measures imposed on Gazpromneft and Surgutneftegaz by the Biden administration in January. In effect, 70% of Russia's 2024 production and exports are now under sanctions.
Sanctions involving Rosneft and Lukoil must be wound down by November 21st. In a coordinated move, the European Union also unveiled its 19th package of sanctions further targeting Russia's energy revenues. The effectiveness of these measures will depend on key three factors.
We have been discussing this since pretty much 2022, so the first factor is how well those sanctions will be enforced. The second, the response of major players in India and China. And finally, Russia's ability to circumvent the sanctions as the country has done in the past.
Overall, our view is that the sanctions are likely to result in stable Russian export flows but narrow profit margins as increased logistical and payment complexities may reduce profitability and prompt Russian producers to offer deeper discounts on their products. So first impact, US dollar exclusion does not prevent Russian oil producers from operating but increases the cost of burden. That's our conclusion.
So a couple of things to keep in mind. Number one is that the designation of Rosneft and Lukoil as specially designated nationals, it's the so-called SDNAs, effectively cuts off access for the companies to US dollar clearing, meaning any transaction routed to a US bank, even indirectly, is automatically frozen. However, a number that is very important to keep in mind, only 5% of Russia's oil exports are currently settled in US dollars.
This is a sharp drop from 55% in 2022 prior to the invasion of Ukraine and the imposition of international sanctions. To circumvent those sanctions and the dollar-based financial system, Russia has significantly shifted its oil trade to alternative currencies, most notably with its top customers like China and India. So according to the statistics from the Russian Minister of Energy, the share of euro-denominated payments has plummeted from 30% in 2022 to just 1% today, while the ruble now accounts for 24% of the transactions and the Chinese yuan dominates at 67%.
However, despite most of Russia's current oil sales being denominated in CNY, so the Chinese currencies, the UAE dirhams and the Indian rupee, key elements of logistics, freight and insurance remain linked to the US dollar. So without access to the dollar system, every step of the export process becomes slower, more expensive and riskier. So the way forward for Russia lies in alternative currencies and settlement systems with companies accelerating efforts to settle transactions in Chinese yuan, the dirhams, the rupee and the ruble using regional banks in China and the Gulf that fall outside the US jurisdictions.
In the meantime, for companies of Rosneft's and Lukla's scale, the SDN designations mean higher transactional costs and longer settlement cycles. The second one is the reputational and secondary sanctions risks. So engaging in certain transactions with SDN designated companies may carry the risk of secondary sanctions, even if they're done outside of the US dollar system or participating foreign financial institutions.
In practice, third party banks and insurers could face increased scrutiny if they process payments for SDN entities, even when those payments are made in non-US dollar currencies. This environment may lead to fewer willing intermediaries and higher premiums from those who remain active in the market. To help manage reputational risk, offshore independent traders and newly established entities not legally connected to the SDN listed company are often utilized.
Setting up new trading companies with restructured ownership is a common strategy, previously seen, for example, with PDVSA in Venezuela and NIOC in Iran. So in practice, this approach enables oil to be cleared at the documentation level. So names like Luk Oil and Rosneft do not appear on the bill of lading.
So the January 2025 SDN measures against wood, neft, gas and gas-borne neft offer a very helpful precedent. So that was the January 10 sanctions from the Biden administration. So what we observed since then is that during that period, publicly available data showed a notable decline in direct exports from these entities, while volumes sold through independent traders and unknown aggregated cargoes increased.
Essentially documented exports from sanctioned companies fell, but overall Russian seaborne volumes were maintained by expanding intermediary trading and shadow shipping. Buyers opted for unknown or third-party cargoes rather than taking title directly from the sanctioned company. This experience highlights two important points.
First is the SDN designation does not necessarily result in a proportional decrease in seaborne volumes. And second, as the size of the sanctioned company increases, the complexity of replicating this alternative trading channels also grows. While Surgutneft, gas and gas-borne neft are significant producers, they are smaller players compared to Rosneft and Lukoil, which control a much larger share of production and global trading infrastructure.
As a result, while time and resources can help mitigate the impact, the operational efforts required to scale this unknown trader model for Rosneft and Lukoil is considerably greater. The January episode also demonstrated that buyers and traders are very quick to adapt and innovate when market conditions warrant it. Having said that, we do believe that the reputation of risk is likely to become an increasingly important consideration for India as sanctions on Russian oil tightened.
The experience with Iran provides a useful reference. So when Washington reinstated sanctions on Iran in 2018, the first Trump administration and payment channels through Indian and European banks were blocked, Indian refiners promptly suspended direct purchases. While physical barrels continue to reach Asia, mostly China via intermediaries, official imports to India dropped to zero.
A similar pattern was observed after US and UK sanctions were extended in January to Surgutneft, gas and gas-borne neft. Direct Indian uptake declined sharply with limited volumes still arriving to traders and brokers in Dubai and Singapore. With Rosneft and Lukoil now under full SDN designation, a comparable adjustment appears to be likely.
So many Indian refiners and their banks will prioritize reputational considerations and continued access to global financial system over discounted crude. Most volumes directly linked to these companies are expected to be excluded from the banking system while remaining trade shifts to secondary channels. For example, in September, exports from other Russian suppliers to India totaled about almost 300 KBD out of a total of 1.6 million barrels per day.
This flows from alternative or unknown suppliers could expand to roughly about a million barrels per day as intermediaries step in, while 200 to 300 KBD may continue to be imported directly from sanctioned companies. However, we estimate that about 400 KBD may no longer be available to the Indian market. So the question is, will Russia be able to direct those volumes somewhere else?
We do believe that at a given time, Russia has the capacity to potentially divert about 800 KBD of its seaborne exports to countries like Egypt, Malaysia, Vietnam, Brunei and South Africa. China's blending capacity also could absorb an additional million barrels per day of Russian crude, although this would raise Russia's share to about 25% of China's imports, surpassing this 20% threshold, a level no single country has exceeded over the past 20 years. So the question is whether China will make an exception for Russia this time around.
So put everything together, we do not anticipate actually any significant disruptions to Chinese flows. Approximately 800 KBD of seaborne Russian exports are directed to independent or smaller private refiners, and even in the four major Chinese buyers who account for about 400 KBD of Russian seaborne, who chose to reduce those direct purchases, these volumes are likely to continue reaching the markets through third parties. This mirrors previous patterns observed since January with Sergutnyavtegas and Gazpromnya.
Cargoes now are increasingly blended with other grades in neutral ports and result as origin unknown. This practice, which has become more common since 2023, remains challenging to monitor and enable sanctioned barrels to continue entering the markets. Logistics and insurance costs are expected to continue rising as EU restrictions on shipping and shadow fleet vessels drive up freight and insurance expenses.
As we pointed out, the EU introduced its 19th package of sanctions yesterday. They recently added 117 tankers to its blacklist of ships transporting Russian crude, 67 of which are newly sanctioned, while the rest were already listed by the UK or the US. So with this latest update, as of yesterday, the total number of sanctioned oil-carrying vessels stands at roughly 634.
We believe that most of the newly designated ships have linked to four previously sanctioned trading and shipping companies, indicating that these measures primarily reinforce existing restrictions rather than introduce new physical barriers. Historical data suggests that overall impact is limited. For example, in July 2025, when 105 vessels were sanctioned for similar reasons, Russian seaborne exports from these fleets declined by only about 150 KBD out of total 750 KBD.
This suggests that fleet owners and buyers are increasingly adapting to these new measures. So overall, the immediate market impact on new sanctions is expected to be relatively contained in our opinion. Both Rosneft and Bluecoil have already established extensive alternative export infrastructure, including offshore trading vehicles, non-G7 financial intermediaries, and the shadow fleet capable of handling substantial volumes.
While physical exports may experience a brief decline, as trade flows suggest, they are likely to normalize within a quarter. The short term will anticipate a period of caution among buyers as they reassess compliance risks associated with newly sanctioned entities. This adjustment phase coincides with ample global supply, with global liquids inventories having risen by over 400 million barrels year-to-date.
During this period, Russian exports are likely to offer deeper discounts, we believe $3-$5 below pre-sanctioned levels to maintain export flows. For Russia, this is unlikely to result in significant volume losses, as the market already factors in a risk premium of approximately $3-$4 for Russian grades. For buyers, these wider discounts will remain an attractive incentive to resume purchases once operational risks are better understood.
Sanctions are likely to result in stable Russian exports flows, but narrow profit margins, as increased logistical and payment complexities may reduce profitability and prompt Russian producers to offer deeper discounts on their products. Unless price spreads widen considerably, we believe these measures are unlikely to cause a structural decline in Russian crude production. Thank you all to listening to the Commodities Edition and J.P.
Morgan's At Any Rate podcast. We look forward to continue the conversation next week. This communication is provided for information purposes only.
Please refer to J.P. Morgan research reports related to its content for more information, including important disclosures. 2025 J.P. Morgan Chase and Company All Rights Reserved.
This episode was recorded on October 24th, 2025. For more information, visit j.p.morgan.com.